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04/24/2011

How Can Governments Help Consumers- Becker

The new rulings announced by the Department of Transportation to force airlines, among other things, to return the fees for checking baggage if the baggage is lost, to post full prices including taxes, and to raise the compensation for being bumped involuntarily from flights, are not very onerous to airlines. However, they do add to the many rules that already require airlines to post various prices, to compensate passengers for bumping, and to engage in other behavior that is supposed to protect passengers. The new and old rules regarding passengers, and many rules of behavior imposed on companies in other industries, such as the so-called consumer protection components of the Dodd-Frank law on financial regulation, all reflect a fall in government confidence in the ability of consumers to make reasonable choices.

I believe this lack of confidence greatly underestimates the capacity of the great majority of consumers to make forward-looking choices in their own interests. It also underestimates the degree to which the forces of competition protect consumers against the consequences of the bad decisions they do make. I briefly defend each of these claims.

Low cost airlines that provide cheap tickets and minimal services grew rapidly after the deregulation of airlines that began in the 1970s allowed the entry of new airlines. Their growth shows how sensitive passengers are to price, and how many are willing to exchange lower prices for fewer services, such as no meals, or no assigned seats. Southwest Airlines started only in the 1970s after facing much opposition from regulators, and it is now the largest American airlines in terms of domestic traffic.

Or consider whether most passengers know that many airlines now add separate charges for checked baggage, even though these charges are often not displayed prominently in advertising or in passenger contracts with airlines. It is obvious from the fact that many more bags are being carried onto planes since these changes went into effect (and thereby delaying the departures of planes) that many passengers both know about these new checked bags fees, and they have responded to them. For those who may be ignorant of these fees, Southwest Airlines constantly reminds consumers in their advertising (“bags fly free”) that they are one of the few airlines that do not charge for the first or second checked bags.

This is not to deny that some passengers are ignorant of the separate charges for baggage and food, do not realize that sizable taxes add to the full cost of airline tickets, forgot about frustrations due to long and unpleasant flight delays, and are unaware of other aspects of the full monetary and psychic cost of flying. However, if significant majorities of passengers are reasonably well informed about full prices of tickets and other aspects of the flying experience, their behavior helps protect the ignorant passengers. For airlines usually have to make their pricing and other decisions on what the clear majority of passengers know and respond to since they usually cannot separate the more active customers from the passive ones. If that majority is responsive to charges that are not prominently displayed, to taxes, and other aspects of the total cost and experience of flying, airlines will tend to keep prices and charges lower to all, including the more ignorant flyers.

Competition among airlines may be an even greater protection for uninformed consumers than the behavior of reasonably well-informed and responsive consumers. As Posner indicates, if government regulations impose costs on airlines, ticket prices will tend to rise since airlines have been struggling for decades just to earn a decent return on their capital.

Suppose, to illustrate the effects of competition, that one airline discovers its profits increase when some of the costs to passengers are placed in small print on the passenger ticket contract because enough passengers act as if they are not aware of the costs found in small print. Then other airlines competing for passengers will copy the first airline, and also put these costs in small print. Furthermore, their desire to get more of the now more profitable passenger business will induce them to reduce prices on other dimensions of travel, or add to services, such as providing assigned seats when seats were not previously assigned, or adding individual videos for each seat. The end result will be that competitive pressures that lower prices or increase services to passengers will help compensate passengers who do not recognize the costs in small print, although to be sure they may be only partially compensated.

So I clearly agree with Posner that the new regulations imposed on airlines are mainly a mistake. They add to the costs of airlines and to the costs of flying in the mistaken belief that most consumers are easily tricked by airlines. Beyond that, the regulators fail to see that competition is the most effective way to protect even ignorant consumers from the consequences of their ignorance. The competitiveness of the airline industry is evident from the many new airlines that have entered and existed this industry during the past 30 years, and from the low profits during the decades after deregulation. Encouraging competition in this and other industries is the only really effective way to help the great majority of consumers, including ignorant and easily fooled consumers.

Comments

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Rider: You have me thinking about any Russian made goods I've seen in the stores here in my, fairly long, lifetime. Other than those little wooden dolls that so ingeniously pack inside of each other in gifts stores I'm not finding much. Perhaps a bit of oil works its way here and goes unnoticed.

Well China might be making a (big) mistake in "allowing" some economic freedom, while maintaining largely top down, centralized control in the social sphere. My bet is that will result in troubles at some point; perhaps being kicked off by those working so hard for very little wanting to spend some of their earns instead of having Ma China recycle it back to the US and other nations to keep the value of the yuan down, and their people largely impoverished.

Too, those kind of nations CAN be unstable, internationally, if as was sometimes the case in Russia, new "managers" set off in different perhaps more hostile directions.

Well, I never really thought the old USSR wanted to lob one at us, and were primarily responding, as nations often do, to being invaded and losing 20 million?? of their most able young men.

China, as you know, has never been successfully invaded, so may be less nervous, and in any case, would think more than twice about tackling powerful nations that are also the dumping grounds for their growing GDP.

History may "repeat itself" but! typically not note for note.

BTW...... a strange thing is happening here. Despite the jobs lost to "outsourcing" and inexpensive Asian and Indian imports, with 10% unemployed and 8% underemployed, somehow, median household income appears to continue on the stagnant flat line as it has for decades while AVERAGE incomes are higher than in any past year.

Perhaps all we need to do is learn to use the leisure time that was so scarce during the Clinton era boom and find ways to fund the existence of those who may never be offered another job.

As for the "Communist" gaining jobs, having spent time in Korea when it was much poorer than today, I'm glad to see the Chinese gaining a toehold on the economic ladder, and am cautiously optimistic with all the communication mediums that seem to help the seeds of democracy grow and bloom, that China will make, peaceful, gains and become responsible good neighbors over the next few decades.

Well, thanks for commenting and these are, indeed, strange and puzzling times, but, as has happened for such a long time now, one supposes we'll muddle through.

So Jack, are you for or against the market? One moment you praise it only to knock it one or two comments later. And if your answer is that it doesn't always work, what would you do then? I've given my fix repeatedly. What's yours?

Xavier: That's a good question and one for much discussion. I see the power of capitalism as a tool to be used, and governed, for the "general welfare of our people". There's a difference there between those who see The Market as an all knowing god with "economic man" only a cog in its mechanism with little concern for those either being crushed by its workings, or those gaming the system and profiting unduly with out producing products or services benefit the people in ratio to their cost.

Most machines, and I see our economic model as a tool/machine has its strengths, power, "sweet spot", flaws and requires governors and controls. Perhaps the operation of a diesel is a good comparison. It's simple really, air and fuel in, power out. But "lugging" at low rpm provides little power, lots of vibration and the engine may destroy itself. If you keep feeding fuel into a diesel it will produce more and more power -- one rated at 400hp -- can be over fueled to produce twice as much, but it will soon melt and perhaps scatter valves and pistons over the landscape. Somewhere in between is a usable power curve and perhaps a different efficiency curve for constant operation.

The economic engine is much the same. When running right it can and has been a powerful engine of production including that of spurring and rewarding creativity, knowledge and plain old hard work. But, like the diesel its not without its flaws and limitations.

For example virtually every advanced nation has some form of farm commodity price support system. The reason for most of them (aside from the pesky intrusion of politics into our pure economic engine) derive from capital in the hands of few and better organized buyers wielding more market power than do the many, much less organized, sellers. DOWN goes the price of most undifferentiated commodities to below the costs of production.

It is the same for most generic, lower, and even medium skilled labor which is the reason virtually all advanced nations have some sort of min wage law and a host of government work rules. You can hear it in what job seekers say: Those of little market power ask "What are "they" paying retail clerks...etc.

Those of some market power (and often an organization such as the AMA, Bar Association) are heard to say "Well we sat down and negotiated a contract......" and then a sizable notch above that are "our" CEO's who are paid multiples of what they "produce" as they "negotiate" their gleanings with "salary boards" made up of others of their small caste who "take care of each other". Corruption really, of a system, that perhaps lacks an effective "market mechanism" for curtailing such excess or that has been purposely distorted. (Likely the case as other advanced nations do not pay their CEO's and upper execs 400 times what their working folks earn)

So yes on harnessing the power of "the market" where it works, and I guess you can spot those areas most quickly when you as the consumer is able to "shop" for what you want, understand the choices, and compare the product. Shopping for food, shoes, clothing, and toothpaste come quickly to mind...... and we see an amazing level of efficiency from most of those sellers.

It's a LOT harder to "shop" for a police dept, school system, electricity, etc so we've a patchwork of public services common to us all and regulated utilities.

H/C falls into that VERY tough to "shop" category. First because we often don't know what we are "shopping" for; is it the per visit price of your GP? or the less than transparent price of the tests and procedures he/she prescribes? As with the "tort reform" set, do we KNOW we need or would benefit from that prescription? Or is it "defensive med?" or that the MRI machine is in the building your primary docs are paying off for their retirement? And, of course, when one staggers into the ER and come out weeks later with a bill the size of two years salary......... it's a bit late for shopping. The power of "the market" may not help us much here.

A bit more? With a short planning horizon, a kid, or even an young family would not be likely to see the far off results of education being worth $8,000/yr and many would "chose" not to purchase. So........ we as a society have cobbled up the system we have that makes that choice a communal one replete with paying the bills be it a large family or small.

And a last: Our beloved "market" has little inherent intelligence or foresight. For example, here in Anchorage, as for Boone Pickens plans for wind power electrical generation, large and small, are being delayed or killed, as the recent dip in NG prices from $8 to $4 makes burning huge amounts of NON-renewable and polluting, NG slightly "cheaper" (except for externalities of considerable magnitude) than the wind power. That the wind power is virtually flat priced for 25 years and is much cleaner and more sustainable is kinda LOST to "The Market". Boone sold his 200 wind generators to, perhaps more "socialistic?" longer viewpoint? Canada and our small wind farm project may also be killed by the, very likely, temporary dip in NG costs and a lack of concern over burning a polluting non-renewable.

As we reach the margins in so many areas depicted by discussion of "peak oil" "global warming" "ocean acidification" "sustainable fisheries" "land use planning" "radiation from Chernobyl wafting around the world" etc. it strikes me that we'll have to rely more on educated projections, than on the near-sighted immediacy of "The Market"

WE can be wrong there of course. As Boone replied when questioned about his late, and perhaps still weak, belief in global warming, he said it was better to err on the conservative side, that is to have perhaps wasted some dollars for a decade, than to have missed a tipping point to world wide disaster. NO "market" has that human wisdom. We have to provide it.

After writing a likely "too long" reply, a box comes up indicating the site "won't accept". It might confuse some into thinking it's the length, but for some reason they have a time limit on the thing.

The cure is to copy your post, refresh the page -- which wipes out your post if you didn't copy it, paste it back, type one character, then hit post or review.

Dave, I remember back in the pre-reg days of more cooperation between airlines. They had some means of splitting up the fares if you missed the Red plane they didn't mind sending you out on the Green company's plane which often helped speed the consumer on his way.

Filling Green's empty seats early would have them flying more efficiently and the seat given up on Red's later flight might be filled by a standby passenger with benefit to all.

I'm SURE that we and the industry could benefit from doing the same today, but it appears it would take another consumer friendly change in the contract.

Also, I want to add. If Becker is so extreme, why does he even bother.

He should just say. I do not agree with regulation regardless of circumstances. Because that is what this comes down to.

Why should I take any argument that Becker makes against regulation seriously ever again?? After all, there is nothing particular about a regulation that Becker is REALLY referring to in arguing against it, besides it being a regulation. I mean, he might mention some specific costs here and there to flower up his point, but the issue is that the thing in question is a *gasp* *clench-teeth* regulation! *gasp*

I think Becker could benefit from brushing up on the parable of the little boy who cried wolf.

Jack, for the record before the blog moves on to the next topic: Your answer on markets was quite comprehensive, a real tour de force, but it didn’t answer my question which was what you would do when they don’t work.

As I have indicated in many postings, with the exception of public goods or goods with clear and important externalities, I would push markets to their furthest and then some, accepting that in the extremes there may be a lot of pain. It is a balancing act in I much prefer the pain of relatively many small units failing throughout the system than large failures when the government intervenes and it fails. We are human and as such we err. When government errs, however, the damage is much larger than when many diverse components of a system fail, but not large portions or the whole system.

Ultimately markets are a coordinating mechanism, a method of organizing very diverse specialized components often very dispersed across very large geographical spaces. Government intervenes through regulation to affect outcomes in ways it deems politically desirable. That is its prerogative. However, when it intervenes it inevitably affects the flexibility of markets and thus their innovativeness, and coordinating and organizing efficiency and effectiveness.

Over time, as we all learn playing monopoly, there does seem to be a natural tendency for the units of a market system to grow excessively and gain undue market power. When that happens I do propose that such excessive growths be cut down to a reasonable size. As a rule any company or institution of any type, including for instance unions, should be cut down to size if and when they reach a size that affects or can affect the system or market as a whole.

Moreover, since markets like any other human system is prone to abuse, government can and should institute strict rules of behavior that it should then police. I draw your attention to the fact that very much of the recent corruption, from Enron on down to the incredible amount of abuse that took place during the housing debacle was out and out fraud for which there are more than an ample number of laws already on the books that could have been called on to penalize not just Wall Street bankers but even, and perhaps more importantly, the countless number of mortgage brokers and so-called financial advisors that misled hundreds of thousands of new homeowners; we tend to forget or ignore these because there are so many.

If anything we already have too many laws. At its core that may have been the, or a major, reason why the countless abuses of the early and mid-2000s were allowed to continue unmolested for so many years in so many hundreds of thousands of instances. Surely you have heard that prosecutors can easily be overwhelmed by cases if they fail to use judgment and exercise discretion in the violations that they choose to prosecute. Heck, you don’t have to go far. Just look at Madoff and how the SEC failed to act despite countless warnings and evidence that was presented to it.

The financial crisis was as much a failure of government as of markets, and as I have shown at some length elsewhere, it was a clear case of too many bignesses failing simultaneously, including bignesses and excesses in the private sector and bignesses and excesses in government. The bottom line is that I much prefer to rely on markets, to eliminate bigness and excesses, and to inject a system of stricter rules of individual behavior that are more limited in number but enforced.

Society has to come together in the political arena to agree on what these rules should be, although I suspect that most if not all are already on the books and if anything what we have to do is eliminate the large majority which just interfere with enforcement of the important rules.

Xavier: I hope it's not taken as being too snarky to point out that we just had an experiment in leaving markets too much to themselves. Even the Maestro of "markets" solving all, Gspn appears to have learned a bit of a lesson on the foxes "guarding" the hen house.

I'll go back to a sports analogy. Be it football, B-ball or baseball the game is ONLY competitive when played within the bounds of the field and by the accepted regulations. If one team downs steroids, goes outside the bounds or shows up with a bulldozer, it's a different game.

Your Monopoly analogy has worth, but its not only huge corporations gaining too much wealth and power but the amassing of too much wealth and income (and pol power) in the hands of far too few individuals. I perhaps post these graphs too often but the do depict the situation well, though if there were an above 99 percentile the line would be even steeper and if it were 99.9 it would be steeper still.

While Becker and Posner have claimed it "doesn't matter" I submit it will NOT work economically and especially will not work politically. A democracy, of whatever form REQUIRES a strong and hopefully adequately educated middle class.

Yes on strict rules of behavior. Whatever canards have been put forth about "the cause" of the financial mess being "too much cheap money" had our banksters hewed to time tested standards and our bond rating outfits of 100 years of reputation, not "rated" junk as triple A.... the "too much cheap money" would have sat harmlessly on the side or been funneled elsewhere......... one hopes under strict rules.

I'd agree that government must be CAUTIOUS in "interfering" or leading the way. One of the President's problems is that of being too far ahead (ever a pol risk) on leading us into LESS dependence on increasingly costly and troublesome, largely imported fossil fuels.

We SHOULD have begun the trek more gradually back when the mid-70's warning bell went off, but was heard only by Pres Carter and too few others. Result? Here we are stuck with the largest fleet of gashogging tipover rigs the world has ever seen, and the US consuming/wasting TWICE the fossil energy per GDP as the EU and more than Canada which is much like us........... but colder. We've been flown well up a blind canyon on energy and are so vulnerable to real or fabricated shortages and price manipulation that I'd think conservatives concerned with national security would be more outspoken and adammant than myself.

I MIGHT agree on there being too many (micro) laws that perhaps could be consolidated into fewer (macro) laws, but! it does seem to take a VERY tight fabric to fence the foxes and rabid wolves out of the hen house these days.

I WISH you'd not have brought up Madoff and the SEC, as my first response is that of the Bush admin having sent the SEC, the anti-trust division and most of the EPA on an eight year junkets FAR away.

Case in point, and agreeing on bigness, that no sooner was the Bush admin in place than the huge merger of Travelers and Citi were completed. Scan through the brief synopsis of Weil's lifelong shenanigans.

Your approach to "bigness" is likely to be just what we've seen....... they get TOO big, and then we dare not let them fall ON US. No, the trust laws limiting to percentages of "markets" has served us well, and the merging of "insurance" and "banking" further muddies the fuzzy line between "insuring" something and "lending" on it. Two nasties don't make a goody!

STRONGLY agree on "coming together" to make the rules........ as is the theme of this thread, but! as The Mess "kinda" subsides, MUCH needed legislation is stalled...... perhaps forever, or "until the next time".

I've no perfect formula of what to do when markets fail, but if we are to have a Fed, and SEC, an FDIC and SLIC if I were "The Man" I'd expect some explanation, and a batch of heads to roll when nothing was done about a chart like this that clearly shows housing departing from fundamental lending formulas, and as the second shows departing (by double) from the added security of rental rates closely tracking owner's holding costs.

These guys MUST have been in Acapulco sunning themselves, if they didn't even hear the constant radio, TV, newspaper, internet touts for "No Doc" liar loans and "qualifying" folks on two year teaser rates that more than double payments for the next 28 years -- without the mortgagee being qualified for the much higher payments. Criminal corruption that has gone unpunished -- so far except for seining up a couple of the victims as perpetrators. Not ONE biggie being prosecuted. For shame!

The written style is very prompt and the highly practical manners. I believe this lack of confidence greatly underestimates the capacity of the great majority of consumers to make forward-looking choices in their own interests. It also underestimates the degree to which the forces of competition protect consumers against the consequences of the bad decisions they do make. To believe that the consumer, any consumer, can come to grips intellectually with an out of control competitive market is disingenous at best. The fact of the matter is, the consumer is a consumer, ignorant and moronic at best. Given the complexity of modern market forces that leads to confounding not only the consumer, but the market place and its mechanisms as well. I briefly defend each of these claims. Keep up the good work.

Jack, everything that you and I say can be encapsulated in your comment that “if I were "The Man" I'd expect some explanation, and a batch of heads to roll when nothing was done about…” Ultimately it boils down to just that, WHO sets the rules and WHO then enforces them.

All of the laws in the books, all of the good intentions behind them, are totally worthless unless the laws make sense and then someone actually enforces them. The beauty of markets is that they do much of that by themselves without the need for human intervention to make them work.

Please go back and read my prior entry in that light, and then if you still believe you can have a better person to write and enforce the law please then tell me how you will assure that when that person is replaced it will be with yet another perfect one. I too like utopia but I tend to be a bit more realistic.

While I am at it let me make a comment about some comments in this blog, something that is well illustrated by Jack’s particularly incisive comments. This is also a comment more generally about science and the scientific approach since the Scientific Revolution. I make this comment as an engineer trained to do an entirely different thing, in some ways the exact opposite of scientists.

Since the Scientific Revolution scientists have been using a reductionist approach to gain a better understanding of how the world works. That approach involves breaking down a system into its parts and then determining how each works and contributes to the whole. It does this by isolating pairs of related parts and then determining the effects on or relationships between each other.

Jack tends to do this more exhaustively than any other commentator and is why his comments tend to be rather long. In doing so, in analyzing the detail too exhaustively, however, there tends to be a loss of understanding of how all of the parts work as a whole, of how they interact as a set of highly interconnected and complex set of relationships.

In contrast, the job of engineers is to take independent causal relationships and tie them together into a single interconnected system or process or machine to accomplish a concrete objective. When engineers analyze interconnected complex systems they tend not to lose sight of how any and all of the parts affect each other to make the whole work.

That is the reason for my previous comment wherein even if we accept that government can write good regulations and then enforce them effectively, how do we then make sure that we have all of the right people and leaders to do this all of the time, always keeping in mind that even just one little failure among many thousands of correct moves can bring down the whole.

I hope that this makes clear why focusing on only some of the causal relationships or even all of them but independently of the whole can be very misleading. It is also why I often find myself agreeing with individual independent arguments but disagreeing with the combined effect. What makes this rather frustrating is that it often results in two people being right but talking past each other.

Xavier: To your first response, it's fairly simple and a named a number of the alphabet soup of regulators who are supposed to be the umpires of various sectors.

In banking, at least, since the last depression we hewed to banking standards that were generally the accepted deal. They weren't inflexible either, as returning Vets took zero down loans and reliably paid them off, Fannie, Freddy and FHA all moved to lower downs BUT hewed to the rather obvious lending stds of insisting the borrower had the claimed income and limiting his payments to 30% of income or so.

When some giddy soul proposes rapid changes in long tested social contracts, perhaps and honest regulator, Congressional committee or even an honest banking industry would ask "to what end?"

You do have a point in being nervous about our lobbyist infested system NOT responding. I remember well the greatly flawed S&L "derreg" that made the taxpayer again the patsy, and especially remember Rep Henry Gonzalez pointing out the growing MESS when it would have been in the single digit billions to repair the dyke and imprison a few dozen of the worst of the miscreants. But! it took years to mend the fence with a cost to the taxpayer of over $100 billion -- kinda big money back in those days.

Sooooooooo, my answer is that as every rancher knows, we have to just keep trying to mend the fences faster than the varmints can figure ways to sneak through them, all the while knowing that as humans are fallible, we'll not always prevail.

More? Some years ago while musing on the extreme difficulties Russia was having with leaving their communist system behind I considered how much easier it is here, where in most individual consumer's mind they HAVE a basic idea of biz law, and what batch of services and implied or contractual warranties apply to their purchase and even an idea how they'd fare if they had to seek redress in court, mediation or with help from the state AG's office.

The emerging consumer and newbie biz guys of Russia would have no such confidence -- to both of their disadvantages and that of their overall economy. Thus, basic, consumer contracts are not innately a drag on the economy....... and specifically, even though they aren't making much, or any profit, the airlines have engaged in a batch of sleazy practices for decades.

Xavier -- on your earlier response, thanks for the compliments on "zooming in" which I've tried to do in support of some of my contentions. I'm just as happy to zoom out too! That's why I often post these, overall results graphs of the rising tide of productivity NOT benefiting the working folk and making a sick joke of the "trickle down theory" of the All For the Rich agenda of the last 40 years:

It's also the reason I often jump right to the housing price roller coaster graph that depicts not only housing soaring uncharacteristically in price, but diverge sharply from the half century relationship to incomes. Should have been QUITE a red flag as one quickly grasped median incomes being FAR too low to support median home prices.

The other quick flaws in the "vital signs" in the graph is that of ownership costs soaring to levels twice or more that of rental rates. In our mobile society even if many (hoping for a yet larger sucker?) WERE willing to pay twice as much to "own" with some flaky NINJA loan to boot, wouldn't a banker or regulator worthy of the name ask "If this guy lost his job and had to move, and his negative equity home didn't sell HOW is he going to pay for a new place to live and service half the costs of the DEBT service on the unsold dog?"

Of course some did ask those questions but caught up in the frenzy of the fully corrupted Ponzi scheme they turned back the their New York broil lunch, sighing "It can't go on forever, but may as well cash in while it is going?"

Indeed. And that IS why we have regulators, Generally Accepted Accounting Practices and once upon a time........ banking standards that stood us in good stead for a long time.

Observer, your comment illustrates perfectly well at least one major appeal of the reductionist approach (my entry of 05/02/2011 at 02:02 PM) and that is the ability that it gives the user to ignore context. You thus made one of my points in that entry. But there is more.

In the sentence you quote from my May 2, 2011 1:14:22 PM entry—“The beauty of markets is that they do much of that by themselves without the need for human intervention to make them work”—you ignore not only an earlier entry by me, but also the full content of the sentence itself, that is, you ignore both context and a suggestion of a direct connection to other important variables.

With respect to the sentence itself, I qualified what it says by carefully and deliberately (not something I necessarily always do!) adding the word “much.” I could have left out that word thus implying that markets can do it all. I didn’t. But I will agree that the point may be too subtle given the power of the main object of the sentence.

Yet if that is so then there is no excuse for ignoring my earlier entry of 05/01/2011 at 05:21 PM where I clearly write that “The bottom line is that I much prefer to rely on markets, to eliminate bigness and excesses, and to inject a system of stricter rules of individual behavior that are more limited in number but enforced.” The last word addresses directly the main point of your comment.

Xavier and Observer: I was going to comment on the last two here and was rereading Xavier's above:

"I draw your attention to the fact that very much of the recent corruption, from Enron on down to the incredible amount of abuse that took place during the housing debacle was out and out fraud for which there are more than an ample number of laws already on the books that could have been called on to penalize not just Wall Street bankers but even, and perhaps more importantly, the countless number of mortgage brokers and so-called financial advisors that misled hundreds of thousands of new homeowners; we tend to forget or ignore these because there are so many"

and..........

"The financial crisis was as much a failure of government as of markets, and as I have shown at some length elsewhere, it was a clear case of too many bignesses failing simultaneously, including bignesses and excesses in the private sector and bignesses and excesses in government."

In your Enron example their lobbyists perverted governments near and far, England, US and one SA country, at least, to implement a corruption enabling utility dereg the damages from which we're all still paying....... it's a goodly chunk of CA's massive debt. But in finality they went well beyond skewing the rules in their favor and a few of the perps have been prosecuted and imprisoned. Arguably, though, slow and far less than perfect "the system worked" and Enron is no more. Both the law and "the market" had its day.

In the far larger scam of housing neither the law nor the market has had its day. Take bond the bond rating scammers for one (of many!) examples. One guy who quit in disgust, wrote an internal memo saying "If a cow produced it we'd give it a rating".

The fully corrupted "raters" profited tremendously by labeling "confusing" packets of mortgage dreck Triple A so that unsuspecting buyers who trusted Moody's, SP, AM Best and others could be defrauded.

Thus far not one has been indicted, with I suppose the implied defense being "Well it was as good as other Triple A turds out there" or "Hey, it's a confusing derivative --- how was I a dumb bond rater sposed to know?" Well, it's your business to know and protect the 100 year reputation of your bond rating firm, for starters. They, like all the other financials are not in prison, and with few exceptions (Lehman) are still in business, in many cases with their post Glass-Steagal choke hold on the throat of America greatly strengthened. Other than the wet tissue of Dodd-Frank no real changes or reforms.

The only "push-back" being that of one bond rater going into biz to be hired by the buyer to rate bonds. But! absent laws or some means of accountability he too could bide his time and cash in by being the "buyer rater to go to" for pawning junk as AAA.

Absent stringent laws and banking stds from bottom to top, it seems predictable as in Observer's example we'll again be sold talcum powder as "the straight stuff".

So we come to your suggestion of breaking them up or preventing mega-mergers (and hopefully getting back to divorcing "insurance" from banking again) and letting them fail as the market discovers the shoddiness of their over-priced goods. But! in this big world I'm told much larger EU or Asian banks will pick them off or buy their names from the scrap heap and we'll again be subject to the power of hot money flows around the world with "recourse" only in some foreign nation or "world court."

Every once in a while I put on my very old "Libertarian" hat, which never has fit very well, and consider, especially with the net, that the gaps between government regulation might be filled by Consumer Reports that would do the shopping, checking and report on cafes that poisoned too many of their customers or corpies that were rip-offs.

But! they'd not be comprehensive nor would they be timely. Instead of your state mandating cafe stds to prevent illness they'd be reporting on those that died months after the data was analyzed and confirmed.

In the case of the corpies, we can see that the current crop of, say bond raters, cared nothing for the reputation of their firm and only used it for personal gain, after which they could care less about flinging the gutted husks on the junkheap while they retired with family fortunes or the younger ones incorporated the "New-Kinda-Honest-For-Now" rating service.

And one last true story that laid complete waste to my rarely donned Libertarian tope?

In 1984 it was time to replace my aging Chev Suburban with something a bit smaller and more nimble. Iococca's new Dodge Caravan fit the bill almost perfectly; so I bought one pretty well loaded with all the options. Not long after we were rear-ended by a driver who apparently didn't see the Wonderbread sized tail lights and hit hard enough that I flattened out the power seat of the driver's side. The fixed one on the passenger side stood up to the impact.

While down at Dodge getting it fixed, I saw a young couple buying a lower model of the same car. The Caravan's being "utility vehicles" were not required to have some of the long mandated safety equipment such as the high backed seats (an extra on mine) that saved us from very serious injury a week earlier, or side impact door bracing and a few other items that might cost $100 or so to include.

I took the time to write about my concerns to Chrysler getting only the computerized response of "thanking me for my suggestions.. yadda". Time went on for several years with smiling Lee hood thumping his wares on TV and then the news article:

A long time salesman who'd bought new wagons from Dodge every few years bought a Caravan as Dodge no longer built station wagons. Well you've likely guessed it, he ended up with the lower end model with the low backed seats banned from passenger cars since the early 60's. And......... was rear-ended, and ended up a paraplegic. And, he sued, pointing out as seemed the case that the Caravan was the snubby-nosed successor to the no longer available wagon, and of course won a large award.

Whatever the amount, I'm sure he'd have much rather not been in a wheelchair for his remaining years, and there was no recall of the many deathwagons produced during the 5 years or so that they took advantage of the safety reg loophole of selling "utility vehicles" to millions of unsuspecting passenger car buyers.

So, nope! We as a democracy must design the economic playing field in a manner to promote "developing OUR resources for the general benefit of our citizens" and constantly maintain and upgrade the fences that would keep out those hoping to profit by stealing from our society or pawning off goods of no, or even negative value.

Costs? Consider the Chrysler case. It seems incredibly dumb! Somewhere in C some fool decided they could save a buck of by offering low back seats as "std" and make more by offering decent seats as in an upgrade package.

This must have gone to their marketing folks, and over to their law department, and even those engineers concerned with providing mandated safety features, and as the Caravan was Smiling Lee's 'baby' up to his desk as well. Each in this huge corp deciding to profit? or "get away with it?" With NO consideration of the safety threat to their customers? And was I the only person to write and tell them of their mistake?

Surely their liability costs were on par with any possible "savings" and as surely they've caused harm to those who had whiplash injuries "paid for" by insurance companies or never reported.

Well these are a few reasons why my never very stylish or comfortable Libertarian lid continues to gather dust somewhere deep in the coat closet.